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Squaring

Squaring. Presentation to BHF Annual Conference 2007 23 rd July 2007 by Tony Twine Director & Senior Economist Econometrix (Pty) Ltd. the Circle. The BHF Southern African Conference 22-25 July’07 Sun City. Squaring. Presentation Outline. the Circle. Medical Inflation in SA

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Squaring

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  1. Squaring Presentation to BHF Annual Conference 2007 23rd July 2007 by Tony Twine Director & Senior Economist Econometrix (Pty) Ltd the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  2. Squaring Presentation Outline the Circle • Medical Inflation in SA • The times have changed, but are they going to change back? • Affordability, quality and accessibility • The AQA principal and economic energy • Three government programmes to think about • Risk equalisation fund • Prescribed minimal benefits • Social health insurance The BHF Southern African Conference 22-25 July’07 Sun City

  3. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  4. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  5. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  6. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  7. Squaring Alternative Source Of Long-Term Medical Price Data the Circle • So far, we have looked at the CPI dataset from SSA • We can also find data in the SARB household consumption data tables • The SARB data is for • Medical & pharmaceutical goods • Medical services • The SARB data is expressed in • Current Rand prices • Constant Rand prices The BHF Southern African Conference 22-25 July’07 Sun City

  8. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  9. Squaring Current vs Constant Price Spending Data the Circle • Previous chart depicted household spending in current Rands • These values allowed for changing prices as and when they occurred • They therefore depicted Rands through the till, or consumption values • If prices are frozen, inflation is removed from the picture • The resulting constant price values represent volume movements of consumption The BHF Southern African Conference 22-25 July’07 Sun City

  10. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  11. Squaring Isolating The Implicit Price Movements the Circle • If we divide the current price values by the constant price values, we get • The implicit price deflator of the collective goods within the product groups • Re-basing both the CPI medical items & the PCE medical items deflator to 1970=100 produces the next graphic The BHF Southern African Conference 22-25 July’07 Sun City

  12. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  13. Squaring Why Do The Price Index & Price Deflator Differ From Each Other? the Circle • The price index is made up of a fixed basket of goods of rigid proportions • The price deflator has an ever-changing mix of goods in it • The price index for medical items reflects price changes only • The price deflator for medical consumption reflects both price & component mix changes • By dividing the price deflator by the price index, we can isolate the mix effect of the goods & services consumed by households in terms of medical care The BHF Southern African Conference 22-25 July’07 Sun City

  14. Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  15. Squaring Factors Influencing Medical Inflation In Short To Medium Term Future1 the Circle • Probably less benign general inflationary environment for SA • Possibility of downward movement of the Rand against major currencies • Skills shortages, both in medical & other fields • Government interventions to make medical schemes more affordable could accelerate demand growth on private medical care sector • Government drive towards generic drugs could have negative impacts on the ongoing presence of pharmaceutical originators • Government obsession with affordability could leave quality & accessibility components of benefits exposed & compromised The BHF Southern African Conference 22-25 July’07 Sun City

  16. Squaring The AQA Principal the Circle • The benefits derived from a product or service that is used are a function of • Affordability • Quality • Accessibility • Affordability is generally considered to be available income divided by price • Quality is a combination of durability, effectiveness, efficiency, practicality and appropriateness • Accessibility is the relative or absolute ease of access to the product The BHF Southern African Conference 22-25 July’07 Sun City

  17. Afford Af1 O Ac1 Q1 Access Quality The AQA Principle Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  18. Squaring The AQA Principal Diagram the Circle • Points on each of the axes represent the quantum of each benefit attribute • The further from the origin, the greater the quantum of the attribute • Connecting the axis quanta creates a “triangle of benefit” • The benefit from the product is represented by the area of the triangle of the benefits • To increase the area of the triangle, one or more of the points on the axes must move away from the origin The BHF Southern African Conference 22-25 July’07 Sun City

  19. Afford Af2 Af1 O Ac1 Q1 Access Quality Extending the Benefit Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  20. Squaring Extending 1 Attribute may Contract Another the Circle • Policy interventions often concentrate on increasing a single attribute • In the diagram, this moves such an attribute away from the origin • But, unless attention is paid to maintaining the position of the other two attributes, they may be drawn towards the origin • This may result in the triangle of benefit not increasing in size because of the intervention • Consider the case of an increase in affordability through price cutting, which reduces quality The BHF Southern African Conference 22-25 July’07 Sun City

  21. Afford Af2 O Q2 Ac2 Access Quality Finite Resources - Something has to Give Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

  22. Squaring Policy Interventions cannot increase benefits without adding economic energy the Circle • Imagine the axis points to be marked by pins stuck into the diagram • Imagine the triangle of benefits to be defined by a string tied around the 3 pins • Moving 1 pin outwards from the origin will draw 1 or both of the other pins towards the origin The BHF Southern African Conference 22-25 July’07 Sun City

  23. Squaring Afford the Circle Af1 O Q1 Ac1 Access Quality Finite Resources = Finite Benefit Perimeter The BHF Southern African Conference 22-25 July’07 Sun City

  24. Squaring The Need for economic energy to increase benefits the Circle • To increase the area of the triangle of benefits • The string needs to be untied • The length of the triangle perimeter needs to be lengthened • The string needs to be re-tied to define the new perimeter and increased area of the triangle • In reality,this requires the adding of economic energy to be achieved • Additional economic energy has various forms, such as • Increasing income • Investing in products and systems • Investing in skills creation The BHF Southern African Conference 22-25 July’07 Sun City

  25. Squaring SWOT Analysis of Three Government Health Programmes Currently Under Development the Circle • Risk Equalisation Fund (REF) • Prescribed Medical Benefits (PMB) • Social Health Insurance (SHI) • Strengths and opportunities as seen by government policy engineers • Weaknesses and threats as seen by the private health industry The BHF Southern African Conference 22-25 July’07 Sun City

  26. Squaring Risk Equalisation Fund – Strengths and Weaknesses the Circle Strengths • Attempts to engage the skilled current ability of funds to discriminate in terms of risk • Fund to be run by Council for Medical Schemes Weaknesses • Current lack of clarity as to retrospective or prospective nature of REF • Relies heavily on the assumption of efficiency/operational strength on council of medical schemes • Council is not supposed to hold reserves • Relies heavily on calculations made ahead of unfolding financial realities The BHF Southern African Conference 22-25 July’07 Sun City

  27. Squaring Risk Equalisation Fund – Opportunities and Threats the Circle Opportunities • Enables the growth of the risk pool • Encourages those previously uncovered to enter the medical schemes environment • Should create more certainty/uniformity of benefits across the industry • Schemes forced to compete on price alone • Rewards those most efficient Threats • Discourages competition • Could entrench inequities which do in the system and individual schemes • What happens if those schemes that should pay in cannot do so? • System in death spiral? • Smaller restricted membership schemes may not survive • REF does not alter external risks to the industry at all but re-arranges financial risks within the industry The BHF Southern African Conference 22-25 July’07 Sun City

  28. Squaring Prescribed Minimum Benefits – Strengths & Weaknesses the Circle Strengths • To prevent medical schemes from transferring their high cost risk to public hospitals (dumping) • Provides a benchmark cost level for schemes relating to costs that they are forced to cover • Acts as a control on the effective risk rating of members Weaknesses • Discourages preventative care at primary level • Focuses on availability of more expensive secondary & tertiary treatment The BHF Southern African Conference 22-25 July’07 Sun City

  29. Squaring Prescribed Minimum Benefits – Opportunities & Threats the Circle Opportunities • Could provide better disease profile of population • Ability to monitor changes in disease profiles • Provides equity between public and private sector • Better management allocation of resources within health sector Threats • Impedes innovation of benefit design • Public private health equity not automatically transferred to equity between schemes The BHF Southern African Conference 22-25 July’07 Sun City

  30. Squaring Social Health Insurance – Strengths & Weaknesses the Circle Strengths • Absorbs a large number of people who are currently employed into health funding system • Those individuals encouraged to this responsibility for the funding of their healthcare • Relieves burden on state by making private healthcare available to members of SHI Weaknesses • Medical scheme business opportunities to be reduced • Inefficiencies allowed to flourish because of lack of competition • One size fits all • If successful treasury could cut health department funding, leaving public health where it was The BHF Southern African Conference 22-25 July’07 Sun City

  31. Squaring Social Health Insurance – Opportunities & Threats the Circle Opportunities • Systematise cover for high probability risk amongst members unable to detect them themselves • Improves access to medical care & private health funding • The promotion of public-private-partnerships at supplier level Threats • Will require a lot more regulation of the supply side • Discourages innovation in benefit design, treatments, medical technology innovation, etc. • Until formalised, could cause uncertainty regarding the future of health benefit funding, keeping people out of the system The BHF Southern African Conference 22-25 July’07 Sun City

  32. Squaring the Circle ~ T H E E N D ~ The BHF Southern African Conference 22-25 July’07 Sun City

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